SoftBank Finally Finds A Bargain

SoftBank continues to make waves by underwriting the valuations of a growing number of turbocharged “unicorns” carrying private values north of $10 billion. It recently bought 15% of Uber at a $48 billion valuation. In partnership with GM, it paid $2.25 billion for a 19.6% stake in Cruise Automation. Masayoshi Son’s conglomerate is also reportedly looking at making a second investment in WeWork at a valuation as high as $40 billion.

But that’s not to say SoftBank isn’t finding bargains. In fact, on Friday the firm participated in what may be the most opportunistic acquisition of valuable startup stakes in recent memory.

In a related party deal, SoftBank and a group of other investors plucked sizable stakes in nearly 50 startups out of a NYSE-listed Chinese internet company called Renren. Among them are minority interests in lenders SoFi (13%), Omni Prime (10%) and Credit Shop (35%), real estate platforms LendingHome (11.2%), Fundrise (26%) and Loadstar Capital (36%), financial information sites Snowball Finance (20.5%) and Aspiration Partners (8.63%), used car sellers Cheyipai (20%) and AutoGo (17%), and even a fast-growing high-frequency-trading firm called Domeyard LP (15.92%).

The deal will be an interesting one to follow even after it’s completed later this week.

Renren, founded by internet entrepreneur Joe Chen, listed its shares in the U.S. in 2011 with big hype. Dubbed the “Facebook of China,” its social network claimed 117 million users in the world’s most populous market and had big-name backers like SoftBank and DCM Ventutes. However, after the IPO, Renren’s social networking business floundered. Users fell by two thirds and operating losses spiraled. But Renren pivoted.

With its IPO proceeds and access to public capital, it began seeding promising startups such as SoFi, LendingHome and Domeyard. Some of these investments, most notably the $240 million it plowed into SoFi, proved to be savvy. Others, like stakes in Motif Investing, Cheyipei and Zhu Chao Holdings led to large writedowns. In the past two years, Renren recorded $215 million in impairments on its investments.

Recently, Renren’s CEO Chen and backers SoftBank and DCM worked hard to either take Renren private or carve out its valuable VC stakes. Ultimately, Renren’s board decided to pursue the carveout, a nonstandard transaction that Forbes examined closely in October. Now the deal’s set to be completed.

These venture stakes are held within a Renren entity called Oak Pacific Investment. SoftBank, alongside Renren founder and CEO Chen and DCM, is buying Oak Pacific from Renren at a valuation of about $500 million (Duff & Phelps did the appraisal). Because they control 71% of Renren shares, this group will pay a total of $134.3 million to Renren’s minority shareholders by way of a $9.18 a share cash dividend to owners of American depositary shares, or a $0.6125 dividend to ordinary stockholders. Renren had offered qualified investors the opportunity to roll their stakes into privately held Oak Pacific in lieu of the cash dividend, but it appears few were willing or able to participate. The carve-out will close later this week, and Renren will begin trading as a stub.

Why watch this deal? After the carve-out, Renren will still operate the internet business that was the linchpin of its 2011 IPO. Last year, it also made a big pivot to used car sales, which ginned up sales. Net revenues in 2017 were $202 million, and they reached $140 million in the first quarter of 2018, led by an about sixfold increase in used car sales. However, it hasn’t led to anything that closely resembles a profit. Operating losses were $87.9 million in 2017, and those accelerated to $25.5 million in the first quarter. For the second quarter, Renren now expects to generate as much as $145 million in revenues, but it doesn’t have a profit (or loss) target.

Will Renren’s operating businesses have any public market value now that its VC stakes have been monetized? Here’s what the company warns in recent SEC disclosures:

Once the Transaction has closed, we no longer own [Oak Pacific Investment] and we have paid the cash dividend to our shareholders, we will have less cash on hand and fewer investment assets that can be readily converted into cash, which will restrict our options if we require more cash in the future. If we are unable to raise cash as required from new offerings of equity or debt or from bank loans or other sources, we may have insufficient cash to fund or expand our business, and our future growth, our results of operations and our financial position may be materially and adversely affected.

While we believe that the value of our SNS business and our used automobile business together with the $90 million debt that OPI will owe us and the value of the cash that we will have on hand after the payment of any special dividend will exceed US$1.00 per ADS, we cannot assure you that our ADSs will remain in compliance with the NYSE listing rules.

If Renren’s stub doesn’t gain much of an investor following on markets, it will have subtly proven to be one of the biggest busts of this internet-stock-led bull market. After raising north of $800 million from public investors in its 2011 IPO, Renren will have returned a small fraction of those proceeds to the public. But provided IPO proceeds were invested wisely in the likes of SoFi, LendingHome, Domeyard and Fundrise, backers like SoftBank that have wrested the deals from Renren may find the exercise to be worthwhile. Especially as they now willingly paying nine-figure sums for stakes in promising startups.

I’m a staff writer at Forbes, where I cover finance and investing. My beat includes hedge funds, private equity, fintech, mutual funds, M&A and banks. I’m a graduate of Middlebury College and the Columbia University Graduate School of Journalism, and I’ve worked at TheS...